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Voltas: Way to go!
Nov 21, 2005

Performance Summary
Engineering services and air-conditioning major, Voltas had recently announced strong results for the second quarter and first half ended September 2005. Robust performance of the company’s electro-mechanical projects & services and engineering agency services divisions has led the growth in topline and bottomline during both 2QFY06 and 1HFY06. Also, despite a rise in raw material costs, operating margins have improved dramatically owing to lower staff costs and other expenditure.

Financial performance: A snapshot…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Sales 2,973 4,761 60.1% 6,431 9,316 44.9%
Expenditure 2,909 4,494 54.5% 6,259 8,814 40.8%
Operating profit (EBDITA) 64 267 314.9% 173 503 191.4%
Operating profit margin (%) 2.2% 5.6%   2.7% 5.4%  
Other income 65 54 -16.6% 130 109 -15.7%
Interest 13 2 -83.8% 23 11 -50.0%
Depreciation 23 28 21.2% 47 53 12.1%
Profit before tax 93 291 212.4% 232 548 135.9%
Extraordinary income/(expense) (1) (78)   30 (152)  
Tax 37 24 -33.4% 63 41 -33.9%
Profit after tax/(loss) 56 189 239.0% 200 354 77.2%
Net profit margin (%) 1.9% 4.0%   3.1% 3.8%  
No. of shares 33.0 33.1   33.0 33.1  
Diluted earnings per share* (Rs) 6.7 22.8   12.1 21.4  
P/E ratio (x)         23.1  
(* annualised)            

What is the company’s business?
Voltas is a major player in the electro-mechanical engineering segment, which involves all aspects of construction of infrastructure like electricals and air conditioning barring the civil structure. The company also has presence in manufacturing of forklifts, textile auxiliary, agro-chemicals and trading of chemicals. On the unitary division front, the company has presence in refrigerators and visi-coolers. Voltas has a joint venture with Fedders of the US for manufacturing of air conditioners. During the period FY00 to FY05, Voltas’ revenues and net profits have grown at compounded rates of 14% and 56% respectively.

What has driven performance in 2QFY06?
EMPS business leads topline growth: The Electro-Mechanical Projects & Services (EMPS) business segment of Voltas had once again led the company’s topline growth. Revenues from this segment have grown by 89% YoY during 2QFY06, thus increasing its contribution to total revenues from 58% in 2QFY05 to 69% in the latest quarter. Considering the level of economic activity and infrastructure development that is expected in India (airport modernisation) and a large part of the East Asian and Middle East regions (shopping malls), we expect this division to remain the chief growth driver for Voltas in the future. As a matter of fact, some of the large contracts won by this division included Burj Towers, Dubai (Rs 3.7 bn), Wafi Hotel and Mall Project, Dubai (Rs 1.2 bn) and Hyderabad International Airport (Rs 1.3 bn).

The company’s Engineering Agency Services division (EAS) has also raked in a stellar performance during the quarter with a revenue growth of 49% YoY. Since Voltas serves the textile, mining and engineering industries through this segment, the huge capex plans that Indian companies have lined up towards capacity expansion shall provide this segment a big opportunity to grow faster going forward.

The unitary cooling products division (17% of revenues) witnessed another quarter of lacklustre growth during 2QFY06. Investors should note that this has been a result of the fact that the refrigerator industry in the country has been bogged down by excess capacities and low demand growth, resulting in losses or flat growth for many companies, including Voltas.

Segment-wise performance…
  2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Electro-Mechanical Projects & Services (EMPS)
Revenue 1,738 3,281 88.8% 3,080 5,445 76.8%
% share 58.2% 68.8%   47.8% 58.4%  
PBIT margin 5.1% 6.2%   5.3% 6.4%  
Engineering Agency & Services (EAS)
Revenue 240 357 49.0% 438 683 55.8%
% share 8.0% 7.5%   6.8% 7.3%  
PBIT margin 36.0% 36.4%   34.7% 38.4%  
Unitary Cooling Products (UCP)
Revenue 747 792 6.0% 2,416 2,606 7.9%
% share 25.0% 16.6%   37.5% 27.9%  
PBIT margin -3.6% -3.9%   0.9% -0.8%  
Others  
Revenue 261 341 30.9% 510 595 16.7%
% share 8.7% 7.1%   7.9% 6.4%  
PBIT margin 17.2% 16.3%   13.8% 15.0%  
Total*
Revenue 2,986 4,772 59.8% 6,444 9,328 44.8%
PBIT margin 6.5% 7.5%   6.3% 7.3%  
* Excluding inter-segment adjustments

Lower staff and other costs aid margins: Despite a substantial rise in raw material costs (from 70% of 2QFY05 sales to 75% of 2QFY06 sales), Voltas has reported a doubling of operating margins during both 2QFY06 and 1HFY06. This has been mainly on the back of decline in staff and other costs. These costs declined from 24.5% of sales in 2QFY05 to 16.5% in 2QFY06. Based on segments, while PBIT margins of the EMPS and EAS segments expanded by 110 bps and 40 bps during 2QFY06, the company suffered a loss in the unitary cooling products division. One positive factor working in favour of the company’s margin profile is the rising revenue contribution of the EAS segment. With just less than 8% share of revenues, this division’s PBIT was 36% of the total PBIT of Voltas in 2QFY06. In fact, the management has indicated to us that it expects to maintain the EAS segment’s margins at the 35% levels in the future.

It boils down to the bottomline: Apart from the expansion in operating margins and despite lower other income, the net profit witnessed a tremendous boost during 2QFY06. This was on the back of strong declines in interest and tax expenses. Voltas’ effective tax rate drooped from 39.2% in 2QFY05 to 8.3% in 2QFY06, thus propelling the bottomline growth. This decline in tax expenses was mainly on account of a tax credit of Rs 32 m during 2QFY06. Also, but for an extraordinary expense of Rs 78 m during 2QFY06, the net profit growth would have been higher still.

What to expect?
At the current price of Rs 495, the stock is trading at a price to earnings multiple of 23.1 times its annualised 1HFY06 earnings. We expect Voltas to continue to benefit from higher investments in infrastructure and opportunities in Middle East and select South East Asian markets. In this context, we believe that while the EMPS division will remain the topline growth driver, the EAS division shall adequately support it on the margin front.

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